The Financial Accounting Standards Board (FASB) has been working through a project on materiality for the past year-and-a-half which was origially designed to align U.S. and international standards. The materiality project affects a number of existing FASB disclosure projects since the two concepts are intertwined.

Materiality is integral to Topic 832, Accounting Standards Update, Government Assistance in terms of defining a threshold for which government incentives will ultimately have to be disclosed. In addition, once materiality is decided, the path will be cleared for the FASB to finish Topic 832 and all other disclosure framework projects that have been on hold.

The FASB’s Financial Accounting Standards Advisory Council (FASAC) met on June 15, 2017 to discuss – among other things – “Applying Materiality in Financial Statement Disclosures”. It appears that the FASB is finally ready to put this issue to bed. And that’s welcome news for those of us waiting on the disclosure projects held up in our pipeline due to this one seemingly innocent but gnarly issue.


For those not familiar with how the FASB got themselves into this predicament, here are some critical details. The Board put out two proposed Updates that ultimately revised the definition of materiality: 1) they proposed Accounting Standards Update, Notes to the Financial Statements (Topic 235): Assessing Whether Disclosures Are Material; and 2) they proposed FASB Concepts Statement, Conceptual Framework for Financial Reporting — Chapter 3: Qualitative Characteristics of Useful Financial Information (FASB Concepts Statement). The intent was to align with international standards.

Stakeholder Feedback

In addition to receiving Comment Letters on both Updates, and performing staff outreach, the FASB recently held a Public Roundtable on March 17, 2017 to discuss the topic of materiality, and solicited feedback from their Investor Advisory Committee (IAC) on June 6, 2017.

The FASB took a slightly different approach with the IAC. The Board showed the IAC the changes that the Board was considering, then the changes they proposed after considering the costs and benefits of the disclosures, and finally showed them what companies could ultimately do as a result of applying materiality, as well as information that companies might omit given the new materiality threshold. The IAC understood the intent of improving the effectiveness of disclosures. They believed that the disclosure requirements were headed in the right direction, and they didn’t seem overly concerned about the information that would be taken out due to the threshold. But, they also felt that the omitted disclosures due to materiality wouldn’t necessarily reduce their costs, or help them do their jobs better.

The Way Forward

The FASB structured its most recent meeting with the FASAC on June 15 into a series of breakout groups, and larger group sessions with preparers, auditors, and investors who were represented in each breakout group. The Board asked members of the breakout groups to return to the larger group with answers to two questions: 1) Do you agree with the materiality definition? If so, should the definition be in the Concept Statements which are non-authoritative, or in the codification which is authoritative; and 2) Do you think there should be some form of threshold for reporting? If so, should the threshold make it clear that a choice not to disclose immaterial information will not be considered an accounting error?

After coming back together from their breakout groups, the members had a robust discussion, addressing such issues as:

  • General agreement that preparers mostly rely on SAB 99 today as a basis for materiality.

  • Investor perspective: most investors see providing more information as costless, so providing more is better. A fundamental question becomes “am I willing to allow management to use discretion to determine materiality?” Investors would like to get to financial statements that are more utilitarian over time.

  • Some analysts say “give me everything and I’ll go find what I need”, but if there is too much information provided, the useful information gets lost such that it becomes a scavenger hunt to find the useful data.

  • What do you need to show an auditor to prove something is immaterial? The risk assessment standards of the PCAOB are helpful as a guideline. You can modulate the amount of work needed to address risk and the amount of audit work scales based on level of risk associated with a particular disclosure item.

  • Materiality is an organic concept and it changes over time.

  • There needs to be some sort of enforcement mechanism.

The group also discussed the question of whether companies should have a materiality disclosure – you know, a disclosure on the disclosure. The concern is that when information is left out because of materiality, and the guidelines that were used for determining materiality are unknown, you’re left guessing. There’s an implication that it would be good to highlight when disclosures are removed or added because of materiality. It’s frustrating when items just disappear off the financial statements and you don’t know why – you assume it’s because of materiality but you don’t know for certain. There was definitely agreement that there could be some value in the concept of including disclosures about when you have not included something because it’s immaterial, but most agreed that’s where it should end. The members agreed that getting into the “why” could be a slippery slope.

Deeper Insights from Preparers

A couple of preparers had some insights that I thought were really worth sharing here. The first came from the SVP, Controller from PepsiCo. She confirmed that they rely on SAB 99 as a basis for materiality, but no matter what comes up, it’s not material to PepsiCo. So they actually look at disclosures on a segment basis in terms of taking a division from a negative to a positive, or going from a low single digit to mid to a high single digit, quantitative and qualitative. PepsiCo has a formal disclosure committee process where they take the filings and blackline them – so if there are any new disclosures, they’re discussed with both the disclosure committee and the audit committee. Policy elections made based on materiality are summarized each quarter and shared with their auditors and reported to their audit committee. Pretty impressive process, to be honest.

Next up was Ford Motor Company’s Chief Accounting Officer. She discussed recent times when the implementation of a number of new disclosures caused their 10-K to “blossom”. As a result, a regulator at the SEC called and said “I see Ford Motor Company is a financial services company that sells vehicles”. And that was an indication that they were spending too much time complying with the required disclosures and not really thinking about the story that needed to be told. Now they take a couple of disclosures every year and break them down to make sure they are correctly telling their story to investors and discussing what they want to communicate in their 10-K. Again, this is great process for a public company that should be looked at for best practices.


The bottom line here (pun intended) is that the FASB is continuing to improve accounting for disclosures and they want to get it right. And the Board’s consistent collaboration with all the stakeholders involved is a fantastic process. The Board confirmed that this meeting was their last formal touch point with stakeholders on materiality. All of this sets the Board up to begin the effort to finalize the disclosure framework in July or August – which is exactly what Russ Golden, Chairman of the FASB, confirmed. Further, the other disclosure projects that include materiality – like Topic 832 – will also be allowed to move forward after this issue of materiality is formally resolved.